The emergence of China as an economic force has created a smorgasbord of business and investment opportunities. And the CBOE Futures Exchange is hoping that the creation of CBOE China Index Futures (CX), which began trading Monday, will help spur its own growth. It's just the third product traded on the six-month-old exchange. The launch of the China Index Futures comes just one week after trading began in the FTSE/Xinhua China 25 ( FXI - Get Report) fund, which joins Barclay's growing list of exchange traded funds (ETFs). Both products contain a basket of China-based companies that have either American depositary receipts or New York registered shares traded on the New York Stock Exchange. While there is significant overlap in holdings -- nine of the 16 stocks that comprise the China Futures Index currently are in the FTSE/Xinhua iShares -- they are of very different construction. The CX is an
equal dollar-weighted index, while the FXI's top five holdings represent nearly 40% of the fund. By contrast, the CX futures offer tremendous leverage. Currently, just $2,500 in initial margin is required to buy a contract with a notional value currently around $28,000. This equates to a 9% effective margin rate. But the CX does require a separate futures or commodity trading account, something the majority of individual investors do not possess. The futures initially will have a quarterly expiration cycle and will have three active near-term months available to trade. The contract is cash-settled, meaning there is no delivery of underlying shares.
"The main users and target of our marketing will be professional traders and small institutional money managers," acknowledged Patrick Fay, the managing director of the CBOE Futures Exchange. "The futures offer a very cost-effective way to gain exposure to the Chinese market." Fay notes that most large institutions, such as Goldman Sachs and J.P. Morgan, already have low-cost access to this group. But remember, the efficiency and low cost of futures stems from the low margin described above, and that leverage can cut both ways. In other words, be aware that, like gains, losses also can be several magnitudes greater than the initial investment.